Thursday, October 8, 2009

A post by Fred Wilson pointed me to Dave McClure's Startup Metrics presentation. This is a great presentation and one that I'm going to point out to startup / early stage company CEOs.
Normally, when I am talking to the founder of any startup trying to figure out what they need to do, one of the things I always try to do is understand their business at its core. In many cases, I can break it down into:

Customer Acquisition Cost – how will you reach prospects, how will you convert them and how much will it cost to convert them

Customer Lifetime Value – how much will you make off of each converted customer

This very simple model works for a surprising number of business models. This kind of a simple model also helps:

Define the early proof points for the company. Often, what we are trying to do initially is show exactly how these numbers play out. You only build what you need to prove that model. If these numbers work out, then often scaling is more a question of capital. In fact, this often becomes the mantra that we live by.

Define what you need from a metrics and reporting standpoint. We'll need to look at different customer acquisition channels, figure out how they are converting, and the expected lifetime value of customers acquired through those channels, and apply cost to those channels. We need to make sure we have these numbers. Quite often the goal is to get them into an excel spreadsheet in a form that allows people to easily play with them.

What Dave McClure's presentation does is point to some additional metrics that are useful to think about and consider:

A: Acquisition - where / what channels do users come from?

A: Activation - what % have a "happy" initial experience?

R: Retention - do they come back & re-visit over time?

R: Referral - do they like it enough to tell their friends?

R: Revenue - can you monetize any of this behavior?

These are captured fairly well by his slide:
The beauty of what he's defined is the relationship between retention and referral efforts and lifetime value. Often, what you find in simple, first cut models are a very simple pipeline. His picture provides a much richer understanding of what will be going on, but still in an understandable and measurable way.
I'm not quite sure I believe the way he exactly models the value from each of these points as is shown in the following graphic, but a similar kind of model can certainly be developed.
The other thing that I think he's really done well is his look at value of different marketing channels.
A couple other great things – wow – I'm going to have a lot to come back to and comment on:

About Me

Dr. Tony Karrer works as a part-time CTO for startups and midsize software companies - helping them get product out the door and turn around technology issues. He is considered one of the top technologists in eLearning and is known for working with numerous startups including being the original CTO for eHarmony for its first four years. Dr. Karrer taught Computer Science for eleven years. He has also worked on projects for many Fortune 500 companies including Credit
Suisse, Royal Bank of Canada, Citibank, Lexus, Microsoft, Nissan,
Universal, IBM, Hewlett-Packard, Sun Microsystems, Fidelity
Investments, Symbol Technologies and SHL Systemhouse. Dr. Karrer was
valedictorian at Loyola Marymount University, attended the University
of Southern California as a Tau Beta Pi fellow, one of the top 30
engineers in the nation, and received a M.S. and Ph.D. in Computer
Science. He is a frequent speaker at industry and academic events.